What is authorised share capital?

In corporate finance, authorised share capital is a key concept every investor or business owner should know. As stated in their founding documents, this term refers to the maximum number of authorised companies that can legally issue shares.

It represents the potential for future growth and expansion by allowing the company to issue additional shares if needed.

What Is Authorised Share Capital?

Authorised share capital, also known as "authorised stock," "authorised shares," or "authorised capital stock," is the total number of shares that a company is authorised to issue. It limits the number of shares that can be issued without seeking further approval from regulatory authorities or shareholders. The authorised share capital is typically set at a higher level than the company's current issued and outstanding shares to provide flexibility for future capital-raising activities.

Authorised Share Capital Example

Let's consider an example to better understand the concept of authorised share capital. Suppose ABC Private Limited has an authorised capital of ₹30 lakhs and has issued shares worth ₹20 lakhs to its shareholders. This means that the company has issued shares up to the authorised limit and still has the authority to issue additional shares worth ₹10 lakhs without increasing its authorised share capital.
However, if ABC Private Limited were to issue shares worth ₹40 lakhs to investors, exceeding the authorised capital of ₹30 lakhs, it would violate the law. In such a scenario, the company would first need to increase its authorised share capital through the appropriate legal procedures before issuing additional shares beyond the previously authorised limit.

How Does Authorized Share Capital Work?

The authorised share capital is typically established during the incorporation process by filing the articles of incorporation or corporate charter. These documents contain crucial information about the company, including its name, purpose, and details about its authorised share capital. The authorised share capital does not consider the issued or paid-up capital, representing the shares issued to shareholders.

Suppose a company wishes to increase its authorised share capital. In that case, it must amend its corporate charter or articles of incorporation, usually requiring approval from the company's shareholders. If necessary, this process allows the company to issue more shares than initially authorised.

It's important to note that issuing additional shares beyond the authorised limit can dilute the shareholding of existing investors. Therefore, companies must carefully consider the implications of increasing authorised share capital and balance the need for additional capital with the interests of existing shareholders.

The Importance of Authorised Capital

The authorised share capital is crucial to a company's operations and growth. Here are some key reasons why it is important:

● Flexibility in raising capital: A higher authorised share capital allows a company to raise additional funds by issuing more shares when needed without immediate regulatory approvals or shareholders' consent.

● Future growth and expansion: Companies often set their authorised share capital higher than their initial requirements to accommodate future growth plans, acquisitions, or expansion initiatives.

● Investor confidence: A well-planned authorised share capital structure can instil confidence in potential investors, demonstrating the company's ability to raise funds and support its growth strategies.

● Legal compliance: Companies must operate within the limits of their authorised share capital to comply with corporate laws and regulations.

Registration Fees for Authorized Share Capital

When a company is incorporated or increases its authorised share capital, it is required to pay registration fees to the Registrar of Companies (RoC). The fees are calculated based on the company's authorised share capital and vary for different types of companies, such as one-person companies (OPCs), small companies, and regular companies.

The registration fees for authorised share capital in India are as follows:

● For small companies and OPCs with a nominal share capital not exceeding ₹10 lakhs, a flat fee of ₹2,000 is applicable.
● For regular companies with a nominal share capital not exceeding ₹1 lakh, a fee of ₹5,000 is charged.
● For companies with a nominal share capital exceeding ₹1 lakh, an additional fee is payable based on slabs of share capital, ranging from ₹400 to ₹100 per ₹10,000 of share capital or part thereof.
It's important to note that these fees are subject to periodic revisions by the relevant authorities. Companies should use the latest fee schedule when incorporating or increasing their authorised share capital.

How Can Authorised Share Capital Be Raised?

Both public and private companies have different avenues for raising their authorised share capital:

● Public Companies:
○    Initial Public Offering (IPO): Public companies can increase their authorised share capital by holding an IPO. This process involves offering shares to the general public, letting both individuals and institutional investors buy shares and become shareholders in the company.
○    Follow-on Public Offering (FPO): Existing public companies can raise additional authorised share capital through an FPO, which involves issuing new shares to the public after the initial listing.

● Private Companies:
○    Private Placement: Private Placement: Private companies can increase their authorised share capital by offering shares to a select group of investors, such as venture capitalists, private equity firms, or accredited investors.
○    Rights Issue: Another method private companies use to raise authorised share capital is through a rights issue. This allows existing shareholders to buy additional shares at a predetermined price in proportion to their current holdings.

Authorised Share Capital Impact on Investors

Authorised share capital can have several implications for investors, both existing and potential:

● Investment Potential: A higher authorised share capital can indicate a company's potential to raise additional funds for growth and expansion, which can attract investors seeking long-term growth opportunities.

● Ownership Dilution: When a company issues new shares to raise capital, it can dilute existing shareholders' ownership stake. Investors should know the potential impact on their ownership percentage and voting rights.

● Funding Flexibility: A higher authorised share capital gives a company greater flexibility in raising funds. It allows it to respond to changing market conditions or seize investment opportunities, which can benefit investors in the long run.

● Share Price Stability: A well-balanced authorised share capital structure, aligned with the company's growth plans and economic needs, can contribute to share price stability and inspire confidence among investors.

●  Investor Confidence: A transparent and well-managed authorised share capital structure can enhance investor confidence in the company's financial management and vision for the future.

Conclusion

Authorised share capital is a fundamental concept in corporate finance that determines the maximum number of shares a company can issue. It is crucial for a company's ability to raise capital, accommodate future growth, and comply with legal requirements. By understanding authorised share capital, investors and business owners can make informed decisions about their investments and corporate strategies while ensuring compliance with relevant regulations.